Chile Senate Approves Tax Package

Finance Minister Negotiated Changes to Garner Support for Tax Increases

Chile's senate has approved President
Michelle Bachelet's
tax package, clearing another hurdle in a push to have the package ready for the 2015 budget.

The upper house of Congress voted 33-1 late Tuesday, with one abstention, to approve tax increases after Finance Minister
Alberto Arenas
negotiated changes that gained the support of opposition lawmakers.

The legal text of the package will be completed by Aug. 7. The tax package then will return to the lower house, the chamber of deputies, where it initially was approved.

The Bachelet administration, which took power in mid-March, wants higher corporate taxes to pay for such things as education improvements. Chile's business community and opposition politicians have opposed the increases, saying a heavier tax load will worsen growth in Chile's already-slowing economy. Economists say uncertainty over the tax structure already has led to delays in investments.

Political analysts say the negotiations for the changes in the tax package show a return to a more traditional consensus approach in Chilean politics.

"A reform with improvements and approved by consensus is much better than what we had a few weeks before. This is still a huge tax increase and hence it will weigh negatively on the economy, but again, at least there was an improvement, which in my view will help sentiment," said Merrill Lynch Latin America economist
Marcos Buscaglia.

The government said it would raise an additional $8.2 billion a year, or about 3% of gross domestic product, in part by removing a tax measure that allows for reinvestment of earnings.

The revised tax package gives corporate taxpayers two options for deciding on their tax system, with one allowing for some incentives for the reinvestment of profits. The revised package also provides more benefits to small and medium-size businesses.

"The substantive changes that favor small and medium-sized business and entrepreneurs were a factor that marked the difference between the bad project that was presented and a reform that helps a sector of the economy that generates the most employment," opposition senator
Víctor Pérez Varela
said.

Lily Pérez
San Martín, the senator who cast the sole vote against the bill, said, "This tax reform is bad for Chile, and with the accord, the appalling becomes simply bad."

A survey published this week by pollster Cadem found 46% support for the tax overhaul and 30% against, with the rest undecided. This was the first time the approval rating was higher than the disapproval.

Chile's central bank forecasts GDP growth of about 3% this year, compared with an expansion of 4.1% last year. Late Tuesday, the central bank cut its monetary policy rate to 3.75%, aiming to spur growth.